Category Archives: Medical Marijuana

[This post is part of a series related to recent client inquiries. It changes frequently so check back again soon. For a broad description of the kind of work I do and representative work, see Services.]

When I was in college, no one would have dreamed that marijuana would become mainstream. Dispensaries are almost everywhere and soon non-medical marijuana use will be legal in California. Washington, Nevada, Colorado, to name a few, are already there.

So how do you cash in?

Build a Business Plan

Nearly every week, I get a phone call from someone “starting” a cannabis business. A few weeks ago, I spoke to a 20 something who already had a pen manufactured and for sale. I was impressed by how much they had done and yet surprised by some of the risks they were willing to take. I thought I’d give you a top ten list of points to consider.

How Much Will It Cost You To Generate The Revenue Number Of Your Reasonable Dreams.

You read that right. What will it COST you to generate your Revenue projection?

For example, say you envision selling an oil or wax product by the gram to dispensaries. You sell at $14 and they sell for $30. And you dream up a revenue number of $1million. That is 66,666 units sold.

Wow, right?

What will it cost you to make that kind of coin?

Presumably you will purchase the flower, cost?

and have it refined right? Cost?

Add up all of your costs including: raw product, third party services, packaging, Labor, salaries, taxes, insurance, delivery, rent, cash management. If you want to be even smarter, separate your costs of goods sold from your costs to sell and run the business.

Well, what does it cost you to generate $1mil in revenue? Still probably a good number right

2. How Does Your Product Offering Differ From Competitors? (other than yours is the best)

Today you can compare your products on websites like weedify and leafly. Come January, that competition is going to triple for a while. Prices will fall.

If you have to start selling your product to dispensaries at $10 per unit or $5 per unit, are you still making money?

3. Partnership? How Will You Break A Deadlock If You And Your Best Friend Own 50/50

When you go into business with another, even if you do not have a written agreement, you are treated as partners. If you do not have an agreement, you run some significant risks. Partnerships can be formed under either an S corp, LLC or even general partnership. Picking the right entity is something I’ve covered elsewhere and if you’ve already formed an entity and aren’t sure if it is done right, that is covered elsewhere too.

Most marriages end in divorces. Business marriage divorce rates are even higher. I won’t go into the details of it but you must have a way to break a deadlock if two owners have equal voting rights. What is your plan for that?

For example, let’s say Al and Bert start off great and then Bert decides he wants to take the business in a different direction. Or, what if Al gets sick of Bert not working as hard as Al, but Bert takes an equal amount of net income. What if Bert decides that he is going to offer a slice of the business to his nephew? What if Al shows up with a new expensive piece of equipment and says “I wrote the check from the company check book because I think this equipment will really be fun to have here.”

How will two equal partners break that disagreement? Without having a serious discussion and taking steps in a written agreement, you’ve bought trouble.

4. Competition: How Will You Adjust When Price Per Gram Is 90 cents or $400 per lb?

I have had several conversations after reviewing a business plan that puts price per lb at $2000 USD. Sure, that happens but in the new world, the price for flower is coming waay down. How will the reality of a $400 lb if sold in a four lb lot effect your business plan?

5. Who Will Pay If Your Pen or Vapor Device Explodes Like an E-Cigarette (and You Have No Insurance)?

I am so impressed by these pen/vape pen companies in getting their products onto the market. I am not impressed by the fact that they all use the same Chinese factories and few if any have product liability insurance. When they blow up in someone’s mouth or pocket like e-cigs did – same technology – you can be sure that a plaintiff’s lawyer will sue you, the dispensary and everyone up the chain to the manufacturer. The manufacturer in China will be insulated from liability because no one will litigate this there.

So what have you done to safeguard IP infringement risk, packing/child proof liability, product liability risk?

6. If You Convert From a Mutual Benefit Corp to a For Profit, Was It Done Right?

Do who did your conversion? Was it done right?

Did it follow the statute?

Generally, a nonprofit public benefit corporation without assets can convert to a for-profit corporation by amending its articles of incorporation and providing a copy of the amendment to the Attorney General at least 20 days prior to its filing. See Calif. Corp. Code § 5813.5(a), (b). However, a nonprofit public benefit corporation with any assets cannot convert into a for-profit corporation through an amendment to its articles unless the amendment has received prior written consent of the Attorney General. Calif. Corp. Code § 5813.5(b). According to the California Attorney General’s publication, “Nonprofit Transactions Requiring Notice or Attorney General Approval,” certification that all charitable assets of the nonprofit will be transferred to another charity is required for consent. Furthermore, the publication states that applications should include:

A letter signed by an attorney or a director of the corporation setting forth a description of the proposed action and the material facts concerning the proposed action; authorizing the proposed action, and board meeting minutes reflecting discussion of the proposed action;

A copy of the corporation’s current financial statement;

A copy of the corporation’s articles of incorporation (if not already on file with the Registry of Charitable Trusts) and the articles of incorporation of any other corporation that is a party to the proposed action;

Any independent appraisals of the value of the public benefit corporation that are available. (In complex transactions involving conversion of a large public benefit corporation, the Attorney General usually requires independent valuation appraisals or other evidence that the transaction is fair and reasonable to the public benefit corporation.);

A statement of the plan for distribution of the assets of the public benefit corporation to a qualified charitable organization, or for payment by the directors or purchasers of the public benefit corporation of the fair market value of the corporation to a qualified charitable organization.

If it didn’t, what is your liability? If you were a member of an MBC and you suspect conversion (or maybe your rights were terminated completely) did not work properly, let’s discuss your rights.

One more thing:

If I had a dollar for every call I get that involves a debit card, selling private placements to cannabis cash holders, I’d be able to buy me some real kicks. No, seriously though: don’t get all jazzed up by a new solution to the age old problem of depositing cannabis cash. If it smells fishy, it probably is.

I get multiple calls each week – how can you help me – a licensed dispensary – obtain a workable banking relationship?

The answer I give is really a question. A series of questions about the business that is calling me and few ever can answer the simplest question.

The simple questions are:

Regardless of what you sell, explain how your business works to me.

Are you licensed?

Who formed your dispensary?

Do you have a lease?

How about a simple one paragraph business plan?

Have you ever been in any type of business?

If you can’t answer these questions to me, lord knows, a bank won’t want to take your money as a depositor. That would be almost true regardless of the fact you propose to be in the medical marijuana business but the marijuana part takes it up a notch. You must be even more organized. This is not the 60s and you must begin to talk and act like a real business person.

Federal Law makes banking as a “marijuana-preneur” really hard.

Here is why: It is plain and simple, Marijuana is still a Class 1 drug and possession and distribution violate Federal law. State law, like in California, differs from Federal law and that only makes things more complex and confusing. For example, how on earth can you maintain a bank account? Nothing here is intended as advice to circumvent state of federal law. Caveat Emptor. But if you prepare a Business Profile based on the concerns of the Federal enforcement agencies, your likelihood of developing a workable relationship with a bank, improves drastically.

Prepare yourself: Create a Business Profile

Business Plan: Using the Cole Memo and SAR Due Diligence Items as your Table of Contents

Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;

Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;

Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;

Preventing violence and the use of firearms in the cultivation and distribution of marijuana;

Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;

Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and

Preventing marijuana possession or use on federal property

[More on the Cole Memo: “The Cole Memo reiterates Congress’s determination that marijuana is a dangerous drug and that the illegal distribution and sale of marijuana is a serious crime that provides a significant source of revenue to large-scale criminal enterprises, gangs, and cartels. The Cole Memo notes that DOJ is committed to enforcement of the CSA consistent with those determinations.” See Fin Cen Directive)]

3. Suspicious Activity Reports: Even if you find a bank that you can work with, they will most likely have to file a SAR. But you should go in prepared to answer these question in advance.

Note: “This FinCEN guidance clarifies how financial institutions can provide services to marijuana related businesses consistent with their BSA obligations. In general, the decision to open, close, or refuse any particular account or relationship should be made by each financial institution based on a number of factors specific to that institution.”

Due Diligence Items You Must Address:

verifying with the appropriate state authorities whether the business is duly licensed and registered;

reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business;

requesting from state licensing and enforcement authorities available information about the business and related parties;

developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers);

ongoing monitoring of publicly available sources for adverse information about the business and related parties;

ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and

refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.

“Marijuana Limited” SAR Filings: This is the reality

To quote the above FinCen Notice: “A financial institution providing financial services to a marijuana-related business that it reasonably believes, based on its customer due diligence, does not implicate one of the Cole Memo priorities or violate state law should file a “Marijuana Limited” SAR.”

Red Flags: If your business exhibits any of these, change your business:

A customer appears to be using a state-licensed marijuana-related business as a front or pretext to launder money derived from other criminal activity (i.e., not related to marijuana) or derived from marijuana-related activity not permitted under state law.

Relevant indicia could include:

The business receives substantially more revenue than may reasonably be expected given the relevant limitations imposed by the state in which it operates.

The business receives substantially more revenue than its local competitors or than might be expected given the population demographics.

The business is depositing more cash than is commensurate with the amount of marijuana-related revenue it is reporting for federal and state tax purposes.

The business is unable to demonstrate that its revenue is derived exclusively from the sale of marijuana in compliance with state law, as opposed to revenue derived from (i) the sale of other illicit drugs, (ii) the sale of marijuana not in compliance with state law, or (iii) other illegal activity.

The business makes cash deposits or withdrawals over a short period of time that are excessive relative to local competitors or the expected activity of the business.

Rapid movement of funds, such as cash deposits followed by immediate cash withdrawals.

Deposits by third parties with no apparent connection to the account holder.

Excessive commingling of funds with the personal account of the business’s owner(s) or manager(s), or with accounts of seemingly unrelated businesses.

Individuals conducting transactions for the business appear to be acting on behalf of other, undisclosed parties of interest.

Financial statements provided by the business to the financial institution are inconsistent with actual account activity.

A surge in activity by third parties offering goods or services to marijuana-related businesses, such as equipment suppliers or shipping servicers.

The business is unable to produce satisfactory documentation or evidence to demonstrate that it is duly licensed and operating consistently with state law.

The business is unable to demonstrate the legitimate source of significant outside investments.

A customer seeks to conceal or disguise involvement in marijuana-related business activity. For example, the customer may be using a business with a non-descript name (e.g., a “consulting,” “holding,” or “management” company) that purports to engage in commercial activity unrelated to marijuana, but is depositing cash that smells like marijuana.

Review of publicly available sources and databases about the business, its owner(s), manager(s), or other related parties, reveal negative information, such as a criminal record, involvement in the illegal purchase or sale of drugs, violence, or other potential connections to illicit activity.

The business, its owner(s), manager(s), or other related parties are, or have been, subject to an enforcement action by the state or local authorities responsible for administering or enforcing marijuana-related laws or regulations.

A marijuana-related business engages in international or interstate activity, including by receiving cash deposits from locations outside the state in which the business operates, making or receiving frequent or large interstate transfers, or otherwise transacting with persons or entities located in different states or countries.

The owner(s) or manager(s) of a marijuana-related business reside outside the state in which the business is located.

A marijuana-related business is located on federal property or the marijuana sold by the business was grown on federal property.

A marijuana-related business’s proximity to a school is not compliant with state law.

A marijuana-related business purporting to be a “non-profit” is engaged in commercial activity inconsistent with that classification, or is making excessive payments to its manager(s) or employee(s).

To speak further about having us help you develop your Business Plan to help you determine compliance with the Cole Memo, the FinCen and the SAR and Red Flags, please give me a call 310-570-2399